TODAY’S S&P 500 SET-UP – June 11, 2013

As we look at today's setup for the S&P 500, the range is 38 points or 1.14% downside to 1624 and 1.17% upside to 1662.         










  • YIELD CURVE: 1.94 from 1.90
  • VIX closed at 15.44 1 day percent change of 1.98%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, May, est. 91.5 (prior 92.1)
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 10am: Wholesale Inventories, April, est. 0.2% (prior 0.4%)
  • 10am: JOLTs Job Openings, April, est. 3.900m (prior 3.844m)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $32b 3Y notes
  • 4:30pm: API weekly inventory data


    • Obama meets w/ President Ollanta Humala of Peru to discuss proposed Trans-Pacific Partnership, other issues; will also give remarks on Senate immigration bill
    • ITC holds hearing on probable economic effect of duty-free treatment for imports in TPP free trade agreement, 9:30am
    • Senate Appropriations subcommittee hears from Defense Sec. Chuck Hagel, Joint Chiefs Chairman Martin Dempsey, 10am
    • Senate Finance Committee votes on nomination of Michael Froman to become U.S. trade representative, 10am
    • Senate panel holds hearing on Puerto Rico’s status, 10am
    • Senate scheduled to hold cloture vote on motion to proceed to immigration legislation, 2:15pm


  • Softbank raises Sprint bid by 7.5% to $21.6b to counter Dish
  • Paulson, #2 Sprint holder, to vote for Softbank deal
  • Bank of Japan left unaltered 1-yr fixed-rate loan facility
  • News Corp. holders to OK plan to spin off publishing unit
  • Sony unveils PlayStation 4 console pressing fight w/ MSFT
  • Nestle’s Nespresso to face new copycat from Mondelez
  • MSCI to announce mkt classification review after 5pm
  • Goldman to expand in Poland even as economy slows
  • ANA says it canceled Boeing 787 flight yday to check engine
  • Safety net scaled back as Senate passes agriculture bill
  • EU seeks air-traffic charge cuts, challenging controllers
  • Most banks expect salary increases to offset EU bonus cap


    • Oxford Industries (OXM) 4pm, $0.78
    • Ulta Salon Cosmetics (ULTA) 4pm, $0.62


  • Copper Touches a Five-Week Low on Concern About Stimulus Curbs
  • Record U.S. Soybean Crop Seen Extending Bear Market: Commodities
  • Wheat Drops a Fifth Day on Prospects for Better Crop Conditions
  • WTI Crude Declines a Second Day on Forecast of U.S. Supply Gain
  • Gold Falls to Lowest in More Than Two Weeks on Stimulus Outlook
  • Coffee Declines on Outlook for Growing Production; Sugar Climbs
  • Shale Boom Curbing OPEC’s Grip as Saleri Sees a $120 Oil Cap
  • Iraq Plans to Boost Wheat Output, Become Exporter in Three Years
  • Oil-Tanker Demand Seen Falling 5% as Bookings and Distances Slip
  • Gold ‘Triangle’ Signals Price Drop to $1,250: Technical Analysis
  • Australia 2013 Wheat Crop May Be 25 Mln T, Grain Trade CEO Says
  • Commodities for Rest of 2013 Seen by UBS Heading for 1994 Redux
  • Car Carriers Fill Up as Global Trade Expands to Record: Freight
  • Iron Ore Seen Rebounding as China Restocks in Year’s Second Half






















The Hedgeye Macro Team













LULU: Meaningful Margin Risk

Takeaway: LULU needed to shore up confidence after 1Q product issues. They blew it. There's margin risk. Maybe not a short. But definitely not a long.

Conclusion: LULU had to do one thing and one thing only this qtr -- instill confidence in the investment community that the recent product issue was a one-off, and it that management is on offense. Unfortunately, LULU blew it. Its quarter was hardly squeaky clean, the outlook is cloudy, and the CEO tendered the most surprising resignations we've seen in retail in a while. This remains a great global growth story in retail -- one of the best, actually. But there's margin risk to the downside. That matters at 33x earnings. It might be a lousy short. But we'd avoid it long.



In the wake of the Luon pant fiasco throughout the first quarter, there was one thing and one thing alone that LULU needed to do with this print -- and that's instill confidence with the investment community that the right team is steering this ship, and that the issues that caused the stumble are temporary and not a sign of more systemic issues at the company. Unfortunately, the company dropped that ball with the announcement that Christine Day is resigning her post of CEO after 5 1/2 years on the job.


Quite  frankly, we were stunned by the announcement. For investors, this is the corporate equivalent of being bitten by your Golden Retriever. There was no warning. Usually when something happens so suddenly, it is the Board's decision, but this one sounds like it was all Christine. Could it be that the Luon pant debacle took its toll on her? Perhaps. But she already canned LULU's Chief Product Officer in April, and the company is in the process of broadening its executive team.  We'd be surprised if her departure was due to this issue alone.


Our sense is that Ms. Day -- who is held in extremely high regard by the investment community -- simply sees that the next leg of growth will be tougher to come by. To her credit, she saw the company through the period in '09 when it was a $3 stock and drove it up to $80. That's $11.2bn in value creation -- or a 27-bagger for those keeping score.


While LULU had several wins this quarter, like golf, tennis, men's and e-commerce, in the end, this quarter was hardly squeaky clean. Aside from the Luon issue, the company noted certain misses from a styling perspective, higher expected landed costs in 2H due to factory/production issues, SG&A deleverage through 2H14 as LULU ramps up its East Coast distribution center, and difficulty in finding store locations to facilitate Hong Kong expansion.


We still think that LULU is one of the few iron-clad brands in retail that can put up 20%+ organic top-line growth on a consistent basis for the next 3-5 years (the others are RH, FNP, UA and KORS). But unlike these other brands, we think that LULU has risk to the downside in its mid-20s margin as the company spends more to facilitate its growth. If we compare it to UnderArmour (or FNP or RH), for example, we see that UA has only an 11% margin, and even it is stepping up spending on the margin to maintain top line growth. We think that LULU will maintain a significant premium to UA, NKE, RH and FNP. But in doing so we still think that the risk is to the 20% range as margins (and even high teens) look to find a final resting place.


This still nets us a respectable 20%-ish EPS growth rate by any stretch (25% top line growth less 500bp due to margin erosion). But with the stock trading at 33x earnings (per the after-hours sell-off) we find it really tough to get excited about on the long side.

Sell Some: SP500 Levels, Refreshed

Takeaway: Every time this US stock market corrects we get a whole new bear case and each bear case is different than the one prior.

This note was originally published June 10, 2013 at 11:02 in Macro



Sell Some: SP500 Levels, Refreshed - bullbear


Ok, I sold more than some. I actually sold ½ my long positions this morning. But not because I am all beared up or anything like that – it’s just process. We bought the oversold signal well last week < 1601, and now the SP500 is 50 handles higher!


I usually don’t use exclamation marks but, this year deserves one. Every time this US stock market corrects we get a whole new bear case. Each bear case is different than the one prior, but it feels equally as tough to buck up and buyem when you should.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1662
  2. Immediate-term TRADE support = 1624
  3. Intermediate-term TREND support = 1583


In other words, now we’re just trying to manage the risk of the intermediate-term TREND range (1582-1662). If you want to think about where I’d be as a % of a full intermediate-term TREND position in US Stocks, I went to 97% of my max allocation last week.


If we test 1583 again this summer, I’ll probably do that again.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Sell Some: SP500 Levels, Refreshed - SPX

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

Twitter Exchange of the Day

Takeaway: We love it when we help our clients make money. A case of free beer for the effort? Icing on the cake.

Twitter Exchange of the Day - hein


Any questions?

@KeithMcCullough 3:50 PM


did the case of beer I sent to 111 whitney arrive last Friday?

@CFRamseyer 3:53 PM


was that you? I don't think it had a name on it!

@KeithMcCullough 3:54 PM


yes it was. Thx for $9k from late thurs thru fri close

@CFRamseyer 3:55 PM

Trade of the Day: XLF

Takeaway: We sold the Financials (XLF) at 9:59AM at $20.03.

We bought the Financials right as it was about to v-bottom. Not a time to get piggy. Book the tidy 3.2% risk-managed gain. That's the TRADE. We remain bullish on the Financials from a TREND perspective.


Trade of the Day: XLF - XLF



Takeaway: Despite SBUX trading at the high end of its historical consensus forward earnings and cash flow multiples, we believe there's more upside.

This note was originally published June 06, 2013 at 22:40 in Restaurants

Our CEO Keith McCullough likes to frame sentiment as being bullish, bearish, or not enough of one or the other. The investment community is not bullish enough on Starbucks. The bear case does not scare us when it comes to Starbucks. We decided to run through some bull and bear points to refresh clients on our thesis.





We remain bullish on Starbucks at current levels. Despite the stock trading at the high end of its historical consensus forward earnings and cash flow multiples, we believe more upside is in store. Bullish factors we are focused on include rapid unit growth in China, expansion into new segments of the global food and beverage industry, and a commodity tailwind that only seems to be getting stronger.


Below, we go through the bear and bull cases for SBUX and offer our thoughts on each sub-point.





Starbucks has been a favorite name of ours for virtually all of the last four years. Aside from a period in 3Q12, when our research process suggested a more cautious stance was necessary, we have been bullish on the stock as it has taken share from competitors in existing businesses and grown its touch points in tangent areas of the food and beverage industries. Despite strong outperformance and plenty of bearish arguments to the contrary, we are reiterating our bullish stance today as we believe that the investment community is bullish, but not bullish enough, at this price.


As the quantitative levels, below, indicate, SBUX is in bullish formation with the immediate-term risk range at $62.63-$64.56 and TREND level support at $59.57.


SBUX: WELL CAFFEINATED - sbux levels 66



Bear Case: Valuation, Sentiment, Portfolio Pitfall, Personnel Changes, EMEA, Brewer Growing Pains




Valuation is a factor we consider when formulating all investment theses but is not, in itself, a thesis. It’s impossible to know if Starbucks’ stock is cheap or expensive at current levels unless one knows the forward earnings of the company. What would make the stock cheap to us is if the future growth potential of the company was being overestimated by the investment community. We do not believe that it is.


SBUX: WELL CAFFEINATED - sbux valuation cahnge







The investment community has become more bullish on Starbucks over the past year as the stock price has risen and visibility on the company’s future growth strategies has increased. Casual dining has seen sentiment rise more than quick service as investors have sought exposure to more discretionary niches of the consumer space. We believe that the stock has further to run over the intermediate TREND and long-term TAIL durations. Our CEO Keith McCullough likes to frame sentiment as being bullish, bearish, or not enough of one or the other. The investment community is not bullish enough on Starbucks.


SBUX: WELL CAFFEINATED - sbux sentiment historical



Portfolio Pitfalls & Growing Pains


The history of the restaurant industry is littered with anecdotes of management teams that thought they could grow forever at an ever-increasing rate. Executive compensation structures more closely tied to unit growth targets than returns typified the folly of so many quick service and casual dining companies. Many companies have reaped the negative rewards of growing too fast and/or adding too many concepts to the company’s structure.


With respect to growth, Starbucks has not been perfect throughout its history. Between 2005 and 2009, Starbucks almost doubled its number of locations, to almost 17,000. In 2007, Howard Schultz flagged changes in the consumer experience to then-CEO Jim Donald as counter-productive initiatives.  Examples included “flavor-locked packaging” and complicated espresso machines that eroded the degree to which visiting Starbucks resonated with consumers.


Perhaps the most acute risk we see in Starbucks’ future trajectory is the growing number of ventures under the auspices of the current management team. We expressed this on 6/5/12 in a note titled “ONE MOVE TOO MANY?”, writing  that the company seemed to be embarking on an investment phase implied added risk to the share price. Managing five concepts, we wrote, seemed to be a departure from the returns-focused strategy had added value to the company in recent years.

The best argument against the idea that Starbucks will begin to destroy value by overstretching its shareholders’ capital is the current management team’s leadership.  Schultz’ emphasis on discipline and rigor in his team’s approach to making capital allocation decisions differs greatly from other, less effective, executives in the industry.



Executive Changes


As Starbucks becomes larger, and a greater number of individuals assume leadership positions, the potential for executives to leave to pursue alternative paths could increase. Michelle Gass leaving the company for Kohl’s Corp. is a blow, with CEO Howard Schultz having praised her impact on several key areas of the business including a key role in the turnaround of 2008/2009.


What Gass’ departure means for the stock is difficult to know. The pessimist may infer that her departure represents, in part, a lack of confidence in Starbucks’ future trajectory as she had, just one month ago, been called back from her role leading the EMEA division to work in an undefined leadership role under Schultz focusing on making the “pieces” of Starbucks work together, according to The Wall Street Journal. Gass worked for Stabucks for 16 years and, in time, may have been a candidate to assume a leadership role in the company’s C-Suite.


We believe that Gass’ departure from the company is a negative but, given her focus on the EMEA division over the past couple of years, it is clear that the company has many other talented individuals that have helped drive important areas of the enterprise forward. If we were to speculate, we would guess that the incentive of almost $10 million over the next four years likely had more of an impact than unease in her role at Starbucks.





The weakness of Europe’s economies poses a risk to all global companies but we believe that Starbucks is relatively well-prepared to weather the storm. The company derives a very small proportion of its earnings, or less than 2% of total consolidated operating income, from EMEA which offers shareholders peace of mind as Europe continues to struggle to find economic momentum. Even with such a low degree of exposure, the company is taking a proactive approach to mitigating the risk of further economic turbulence in EMEA by increasing the proportion of licensed to company-owned stores.


SBUX: WELL CAFFEINATED - sbux emea pod1


SBUX: WELL CAFFEINATED - yum mcd sbux opinc



Bull Case: Strong Dollar, Growth Runway, Commodity Costs, Mgmt Team, ROIIC


Strong Dollar, Strong America, Strong Consumption


In November 2012, our Macro team turned positive on U.S. growth, which is 71% consumption, as the strengthening U.S. Dollar gave consumers a food and energy price cut. With the U.S. economy continuing to improve, we believe that Starbucks is one of the best ways to play a strengthening consumer. Jobless Claims, in particular, are an important metric for Starbucks’ Americas business as, in the most basic terms possible, more people going to work translates very closely into more people buying coffee as part of their daily routine.


SBUX: WELL CAFFEINATED - sbux americas pod1



Growth Runway


The strength of Starbucks’ Americas retail business is well-appreciated. Additional growth over the long-term TAIL will be largely driven by other segments of the business such as CPG, China, India, K-Cups, single-serve, home brewers, tea ($40 billion category), juice, and food among others. With management aiming to double the China unit count to 1,500 from 700 by the end of 2015 and viewing the CPG business as potentially becoming as large as the U.S. retail business, we believe that Starbucks is far from the end of the growth phase of its maturity curve.



Coffee Costs


Favorable coffee costs, coinciding with strong top-line growth, have resulted in strong earnings and cash flow generation. This tailwind is likely to continue through the end of the year and beyond, with management expecting a $100 million tailwind from coffee in 2014.





Management Team


This is not a quantifiable factor but for anyone that has been following the restaurant space for any significant period of time, it is evident that a management team’s aptitude is often evident in their communications with the investor communities. Starbucks, over the last five or six years, has demonstrated a consistency in its message and its commitment to prudent growth that has set is apart from most of its competitors. Starbucks’ brand is one of the best-recognized in the world as the company has taken proactive steps to build an industry-leading loyalty program and an unrivalled social media presence, which has manifested in strong organic growth.





Last, but certainly not least, the ROIIC metric indicates that management is walking the walk. This chart is a key component of our process on all restaurant names – particularly those growing units – and Starbucks is better than most at sustaining a disciplined approach to expanding its business operations.





Howard Penney

Managing Director



Rory Green